China Resources Defends Shanxi Coal Mine Acquisition

The Chinese company accused of
deliberately overpaying for three coal projects in 2010 defended
the purchase after the claims wiped out almost $3.9 billion of
market value in three days.

China Resources Power Holdings Co. said yesterday it paid a
fair price for the assets in Shanxi province after getting two
independent assessments. It hadn’t made the deal public because
the company said its equity interest in the projects was below
the disclosure threshold.

All five of the state-owned parent company’s units traded
in Hong Kong plunged after allegations against it and Song Lin,
the chairman of its parent company, were made public by the
official Xinhua News Agency on July 17. Xi Jinping, who became
China’s president in March, has pledged to investigate and clean
up corruption at the highest levels of power.

“We believe it was a poor decision to make the investment
in the Shanxi coal mines in 2010, as suggested by them not yet
having commenced operations,” Pierre Lau, an analyst at
Citigroup Inc., wrote in a note to clients dated today.

The defense came a day after Xinhua posted a letter written
to the Communist Party’s corruption inspector by Wang Wenzhi,
one of its reporters, alleging the power generator and the
chairman of China Resources Holdings Co. paid about double what
another company bid. Wang’s letter couldn’t be found on Xinhua’s
official news website xinhuanet.com today. China Resources
Holdings employs more than 400,000 people.

A group of minority investors said yesterday they filed a
lawsuit in Hong Kong with similar allegations. They have no
connection with Xinhua’s Wang, Li Su, founder of Hejun Vanguard
Group, which is representing the investors, said at a briefing.

The controversy surrounding the purchase of the mines may
help derail a plan for China Resources Power and China Resources
gas to merge. The plan, announced in May, would create a more
integrated energy company and the combined company would have a
total value of $16 billion based on yesterday’s closing price.
The merger has yet to receive approval from shareholders, who
will vote on the proposal on July 22.

Offer Remains

“The company has not changed the offer,” a China
Resources Power media official said by telephone today from its
Shenzhen Headquarters, declining to give her name, citing
company policies. “The company will keep investors posted if
anything happens.”

China Resources Power said in a statement filed to Hong
Kong’s stock exchange yesterday that the best interests of
shareholders have always been its top priority and that it
reserves the right to take legal action against any party that
releases false or unsubstantiated information that jeopardizes
its reputation. China Resources Holdings the night before issued
a statement on its website calling reports that it overpaid for
the mines “malicious.”

Positive Move

“It’s a positive move for the company to respond in a
timely manner, otherwise the negative news could dominate talk
and continue to drag down share prices,” said Shi Yan, an
analyst at UOB-Kay Hian Ltd. in Shanghai. “Where the dispute
goes next really depends on what new evidence will emerge from
China Resources’ opponents.”

In his letter, Xinhua’s Wang alleged that Song and other
executives deliberately overpaid. China Resources Power bought
an 80 percent stake in the mines for 7.9 billion yuan ($1.3
billion), while another company had offered to pay 5.2 billion
yuan for the entire asset a few months earlier, according to the
letter, which was addressed to the Communist Party’s Central
Commission for Discipline Inspection.

Party Corruption

The commission is responsible for investigating corruption
and misconduct among Communist Party members. It operates a
telephone hotline and a website where reports of misbehavior can
be made. Song is a member of the party and was a delegate to the
18th Party Congress held in November.

In addition, Song also serves as an independent non-executive director for Geely Automobile Holdings Ltd. (175) He has a
bachelor’s degree in solid mechanics from Tongji University in
Shanghai, joined China Resources in 1985 and was named a
director in 1998, according to a profile on the company’s
website.

Song told the South China Morning Post in a 2005 interview
that his self-professed nickname was “the general manager
killer,” because he had fired 10 division managers in seven
years. He said he put “a lot of pressure” on division heads
because the company’s businesses were labor intensive, making
management of workers crucial. “We want a management team with
younger managers, even more professional training and an even
higher level of integrity,” he said, as cited by the Hong Kong-based newspaper.

People’s Daily Online, the website of the Communist Party’s
official newspaper, reported yesterday that the discipline
commission had received and was processing a report on
allegations relating to China Resources. A spokesman for China
Resources Holdings, who asked not to be identified because of
the company’s rules, declined to comment on the report.